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A Personal Income Tax Cut May Cost Government Dearly

The government may not accept all the recommendations of the task force set up to review direct tax laws.

Finance Minister Nirmala Sitharaman during the Income Tax Day event in New Delhi. (Source: PTI)
Finance Minister Nirmala Sitharaman during the Income Tax Day event in New Delhi. (Source: PTI)

The government may not accept all suggestions of a task force’s set up to review direct tax laws as that will cause huge losses at a time it’s struggling to bridge the budget gap, according to a senior official.

But a cut in income tax rate will not be revenue neutral if the government decides to keep existing exemptions given to taxpayers unchanged, the official, privy to the panel’s recommendations, told BloombergQuint on condition of anonymity.

Rationalising personal income tax rates would cost the exchequer about Rs 80,000 crore but doing away with various exemptions could offset the revenue shortfall, the official said citing the tax panel’s report. The move, according to the official, would also significantly improve compliance.

While the panel also recommended scrapping of surcharges and cesses levied on individual taxpayers, the government is unlikely to scrap such levies as it gets the entire share of surcharge and cess collected and doesn’t have to share it with the state governments, the official said.

The government is unlikely to cut personal income tax due to fiscal stress on account of lower tax realisation amid slowdown in the economy, newswire PTI reported citing unnamed people. Net direct tax collection grew about 5 percent year-on-year to Rs 4.54 lakh crore as of Sept. 28, against the government’s projection of 17 percent growth over last year. Indirect tax collections have also not been as expected with Goods and Service Tax collections for the month of August falling to a 19-month low of Rs 91,916 crore due to slowing consumption in the economy.

An income tax cut at this juncture will have an impact on the government’s fiscal arithmetic, Devendra Kumar Pant, chief economist at India Ratings and Research, said, adding a tax cut for the people at lower income slab will have a much larger impact on demand.

NR Bhanumurthy, professor at National Institute of Public Finance and Policy, however, said any reduction in taxes should increase compliance and will not have an impact on government finances on a net basis. One needs to have a more holistic view on income tax cuts, he said.

The government had not taken into account the direct tax panel’s suggestions before it slashed corporate tax in September. This, according to the official quoted earlier, led to higher projected revenue loss of Rs 1.45 lakh crore per annum against about Rs 1.2 lakh crore estimated by the panel.

Finance Minister Nirmala Sitharaman last month reduced corporate tax rate to 22 percent, excluding surcharge and cess, against 25 percent suggested by the DTC panel. The government chose to continue levying surcharge and cess taking the effective corporate tax rate to 25.17 percent which was against the task force’s suggestion of scrapping all surcharges and cesses.

What The Task Force Suggested

The panel has proposed to provide relief on income tax for salaried individuals earning up to Rs 20 lakh, and charge a tax rate of 35 percent for income above Rs 2 crore, the official quoted earlier said.

As per the proposed changes, individuals earning Rs 2.5 lakh to Rs 10 lakh will be taxed at 10 percent, those earning between Rs 10 lakh to Rs 20 lakh at 20 percent. Individuals earning Rs 20 lakh to Rs 2 crore will be taxed at 30 percent, and those with income over Rs 2 crore will be taxed at 35 percent, the official said citing the recommendations.

The panel has also suggested discontinuation of surcharges and cesses levied on personal income. It has proposed allowing tax rebate up to Rs 5 lakh, the official said, adding that exemptions should be given only for savings that would include contribution to Provident Fund and National Pension Scheme, health insurance, education, housing and charity. Disallowing tax rebate on interest income on savings account, and other exemptions would help the government in saving Rs 20,000 crore annually, the official said.

According to budget documents, the government has projected a revenue impact of Rs 97,344 crore in 2018-19 for offering tax exemptions for certain investments and payments under Section 80C, health insurance premium, among others, to individual taxpayers.

Rationalising tax rates would help in improving compliance through which the government would gain around Rs 50,000-55,000 crore, the official said citing the tax panel’s report. Suggestions like allowing taxpayers to reveal undisclosed income for the last six years, as against one year currently, without payment of penalty will help in improving compliance, the official said.

What The Tax Cut Would Mean

According to the proposed tax structure, an individual earning up to Rs 10 lakh will see his tax liability going down. The individual, if he/she avails maximum deductions, ends up paying Rs 28,600 as tax, inclusive of education cess. This liability would reduce to Rs 25,000 if the panel’s proposed recommendations are accepted.

According to income tax statistics released by the government for the assessment year 2018-19, over 4.19 crore returns were filed by individuals whose gross total income was between Rs 2.5 lakh and Rs 10 lakh. About 1.47 crore individuals whose gross total income ranges from Rs 5 lakh to Rs 10 lakh will benefit from a 10 percentage point cut in tax rates if the proposal is accepted by the government.